Are we there yet?

Where to from here? Dead cat bounce or market bottom? Both the torment and the titillation of financial markets is that no one, not a soul, actually knows. But let's have a stab at it anyway as this, as always, is the big question.It should be said that at some point the market will once again rise above its previous peak, in our case scaled early last November. The vital question is when. It could be some time.
There are broadly five opinions: two optimistic, two pessimistic and one apocalyptic. After years of getting it right with a ''buy the dip'' approach, the optimists have taken a battering of late.

The bulls tend to get it right more often than the bears do as equity markets go up more often than they go down over time.
The first and most optimistic market opinion sees last week's - in fact every week's - bounce as the bottom of the market. It's time to buy, say the bulls, the Fed's salvage operation - hammering the cash rate lower and forking out treasuries to prop up ailing Wall Street banks - has worked. Bear Stearns marked the nadir. Commodity prices will hold. There will be no world recession and a modest recession in the US at worst, which is already factored in to ailing share prices. In any case, China and India will continue to ``decouple'' from the US, they say. Indeed, on a price and a yield basis the equity markets do look cheap.
The second optimistic view, though more realistic than the first, is that we are near enough to the market bottom. Things may take a few months to recover. Volatility will persist as confidence is restored. Still, the worst is over, it's time to buy.
Now to the bears.
The little bears reckon recession in the US and here will reduce consumer activity. Lower demand from consumers means lower company profits. Expectations of future profit determine share prices, hence share prices will continue to slump. The market is 10% to 20% from bottom and we are in for six months to 18 months of bear-market gloom.
Then we have the big bears who, not without reason, see more similarities with 1987, 1974 or 1929 and their aftermath than the blip or bubble of 2001. According to the big bears, there is 20% or more to come and a bear market which will endure for two years to four years or more. Some technical analysts, Elliot Wave adherents for example, are crying that a long-term slump is inevitable. The Armaggedonists are worth a mention too for their doomsday scenarios have been getting more airplay of late, particularly on the internet. For these seers, it's all over for capitalism. Grow your own vegies, buy the home-brew kit and run a few chooks.
Though keen to be proved wrong, this writer has for some time been a swinging bear, moving variously between the little and the big bears' camps. Liquidity has gone from credit markets, the banks are yet to grind through their bad-debt cycle. Inflation is yet to be slain in the US and Europe, or China for that matter. And while the Australian banking system and the consumer are in far better order than their US counterparts, thanks to superior regulation and a more aware and risk-averse culture, consumer debt is at record levels. Any drop in employment, also at record levels will hit company revenues.Company earnings are already being downgraded. The next trend will be asset prices. Company executives and their auditors have been fairly generous in their appraisal of value as the bullmarket soared on for years. Apart from the Allcos, Centros, MFSs, Challengers, Ascianos and Babcock and Macquarie satellites, corporate balance sheets may be in fair shape, but their shape is somewhat skewed by the glowing asset valuations that have helped fuel market prices and helped companies strap on more debt.
The takeover binge has left oceans of goodwill lazing around balance sheets, which at some point will have to be dealt with. One example of a solid financial in this shape is Suncorp, whose $8 billion acquisition of Promina has left $7 billion of goodwill on the balance sheet. The overpaying, the downturn in premium and investment income and the exodus of Promina executives mean the jury is well out on this deal. What of the $7 billion? The rub with the bullish view of the market is that it ignores too much. The US is only just tipping into recession now. It's bad. The rash of loan defaults and foreclosures, and the aftermath is yet to come.
Not only could you buy a house and a car with not a cent upfront, interest-free credit cards were de riguer. There was about $US600 billion in home equity withdrawalls alone last year; that makes a $US200 billion stimulus package look small. Now asset prices are crashing but the banks passed on much of their risk, via CDOs and assorted fancy securitisations to markets.Rather than cop writedowns on this hybrid rubbish, the banks have simply parked it off-balance sheet in SIVs (special investment vehicles) and the like, with the regulators and ratings agencies blithely ignoring it. In its defence, the US government has more critical issues to attend to, such as bailing out Bear Stearns to preclude the drastic knock-on effect of a wave of hedge fund assets freezing up and triggering a 20% drop in the Dow.Still, the financials in the US and elsewhere have a long way to sort out their problems and with credit markets iced over the pain is yet to transpose to the real economy. Globalisation means everything is connected to the US, the engine room of the global economy, including China. Inflation has run into double figures there and to contend that the boom in commodity prices will proceed apace is optimistic in the least. Against this backdrop there are myriad catastrophes that may well befall markets, such as in derivatives - the largely unregulated, unreserved credit insurance market of credit default swaps, for instance. Merrrill Lynch has just sued XL Capital Assurance to force the bond insurer to honor $US3 billion of guarantees on CDOs in a bid to stave off more writedowns of its own. Just one case, just another $US3 billion.What the guarantee of leading bond insurers MBIA and Ambac is worth is anyone's guess. What a rating from S&P or Moody's is worth though doesn't take much guesswork - zilch is the figure. All this is just touching the surface. To call the bottom with any certitude now would be verging on the reckless. It is a fair dinkum disaster out there in finance-land, it's spilling over to the real US economy and the bump-on effect will spread like shockwaves through the world. Should China hold, Australia will be all right but it will hardly bounce back to bullmarket territory for a while. Should China begin to fold, the big bears will be growling ''told you so''.